Assuming you’ve reached the stage of consistent profitability in your trading how do you improve your trading and ultimately your P&L?
You have three options:
1) Increase your position size
2) Hold your profitable trades for longer
3) Increase your trade frequency
Let’s discuss the advantages and disadvantages of each option.
Increase your position size
This is a relatively simple way to improve your P&L. Increase your size gradually and assuming you are not increasing it to a point that affects your fill price due to the liquidity of the instrument you are trading then your P&L will increase accordingly.
But this must be done gradually, increase your size by too much and the difference in account swings could trigger a different attitude to your trades and adversely affect your trade results.
Advantages: Simple to implement, nothing needs to change with your trading strategy.
Disadvantages: Increasing your risk, takes a while to become used to the increased size.
Holding your profitable trades for longer
This sounds simple, and is only really applicable to traders using a scaling strategy or those not squeezing the full move of the trade with their current strategy. However it requires a fundamental change in your trading style, it takes time to change your strategy and of course there is a danger that trades won’t run as far as you’d hoped and with no scale a scratch trade can become a loser.
Advantages: No increase in risk
Disadvantages: Needs a fundamental change in your trading strategy, could disrupt your edge.
Increasing your trade frequency
Assuming you have a profitable bank of trading strategies the more often they are used the more profit you can make. Like a casino who has several table games which give them a house edge, the more often that roulette wheel is spun the lower the risk and the more predictable the returns.
The question becomes, how do you increase your trade frequency?
Do you look for more trades in the same market or do you increase the number of instruments you are trading?
The problem with the first option is that you should already be squeezing as many good trades as possible from the market you are watching. Push it too much and you run the risk of taking poor trades with no edge, trying to force trades is a sure fire way of killing your profitability very quickly.
So that leaves the second option, trade your setups in more markets. But is it feasible to be in tune with multiple markets?
continued in part II